Question

Which one of the following items acquired in a business combination is least likely to require that the acquirer reconsider the acquiree's classification?

A. An investment classified as held-to-maturity by the acquiree.
B. An investment classified as held-for-trading by the acquiree.
C. A lease classified as a sales-type capital lease by the acquiree.
D. A derivative instrument used for speculative purposes by the acquiree.

Answer 1

The investment least likely to require reconsideration in a business combination is an investment classified as held-to-maturity by the acquiree. This type of asset typically aligns with a long-term financial strategy that might not be affected by the acquisition.

Option 'a' is the correct.

Step-by-step explanation:

The question you are asking pertains to the accounting treatment of different classifications of assets in a business combination.

When an acquirer takes over an acquiree, they need to reassess the various assets and liabilities they are acquiring to ensure they comply with the relevant accounting standards and reflect the true nature of the economic benefits and obligations assumed. The classification of assets influences how they are measured and reported in financial statements post-acquisition.

Assessment of Asset Classifications:

1. Investment classified as held-to-maturity: These assets are debt securities that a firm has the positive intent and ability to hold to maturity. This category generally needs less reconsideration as the intent and ability are often still aligned post-acquisition.
2. Investment classified as held-for-trading: These are typically bought and held primarily for selling them in the near term, thus requiring frequent valuation at fair market price, and often need to be reassessed for classification as the acquirer may have a different intent.
3. A lease classified as a sales-type capital lease: The classification of leases may need reassessing as the terms may not be favorable or in line with the acquiring company's operations or leasing standards methodologies.
4. A derivative instrument used for speculative purposes: Due to the inherent volatility and the specific strategies applied to these instruments, they almost always need reconsideration with regard to their classification and valuation.

Answering this question, the item least likely to require that the acquirer reconsider the acquiree's classification would be A. An investment classified as held-to-maturity by the acquiree.

This is because the nature of held-to-maturity investments suggests a long-term financial strategy that is less likely to be disrupted by the short-term strategic changes that might accompany a business combination.